REITs pave the way for individual investment in real estate Budget 2015 brings REITs closer to realty
REITs enable people with a risk appetite to invest in the real estate market without the need for a large capital commitment REIT regulations expected to bring much-needed relief to cash-strapped developers
REITs or real estate investment trusts, much like mutual funds, are essentially vehicles that raise money via investors and invest the sum collected into real estate assets such as shopping centres, offices, commercial spaces, etc. The income generated from real estate investment of REITs is distributed amongst its unit holders or investors.
A key feature that makes the REIT structure attractive is that it provides an avenue for individuals to foray into the real estate market with minimal investment commitment. Investors traditionally putting their money in the realty sector are expected to invest in either residential or commercial property, which would require substantial capital. On the contrary, investment in REIT may cost as less as ₹ 2 lakh. This allows even the middle income investor to participate in the sector, previously out of reach due to the high entry price barrier because of high property values.
As units of the REIT are listed, investment in the trust also provides liquidity to an individual investor which investment in real estate assets does not offer. This is because sale of property may take a few weeks or months. Further, investors putting their money in REITs can also avail of a partial exit facility which means that they can partially sell off their holding, which may not be typically possible in case of direct investment in a real estate asset.
REITs provide a regulated platfor m to the i ndividual investor and is a transparent investment vehicle, much like a mutual fund, with experienced professionals and fund managers that identify and manage investments. Due-diligence is conducted by REIT managers prior to an investment, thus saving individual investors the hassles of carrying out background checks of property builders and developers.
Another advantage is that individual investors get an opportunity to invest in a diversified portfolio in the realty sector. Units of REIT derive value after they are invested in several projects, thus diversifying the overall investment risk and return for the investor.
REITs has been accorded a ‘ tax pass- through’ status, which means that unit-holders will be taxed for the income that they earn from REITS and not the trust. The benefit of this is that the same income is not taxed twice. There was some contention with respect to the pass-through status for rental income earned by the REITs from directly owned assets, but the recent Budget proposals have addressed this issue and accorded it a pass-through status, thereby making it taxable directly in the hands of the unit-holders. to introduce certain changes in the construction sector. Sharing the latest achievements of GRIHA he commented that “… we have over 21 million square metres that have been registered for GRIHA certification.”
So far 575 projects have been registered, and it is expected that more than 150 projects will be added this year. Dr Leena Srivastava, acting director-general, TERI, stressed on the rapidly changing environment and the need to involve all stakehold- Individual investors will also benefit from concessional tax rates if tjeu invest in REITs on transfer of units that have been subject to Security Transaction Tax (STT’. The sale of units is exempt from tax if held for more than 36 months and units held for less than 36 months are subject to tax or short-term capital gains at the rate of 15%.
Given the current economic environment, successful REIT implementation can be critical for the revitalisation of the industry. It presents a distinct investment opportunity for those investors who have a risk appetite for real estate investment without the need for a large capital commitment. ers. “Climate, as we know it, is changing. While we want people to occupy green buildings, and there are more energy service companies stepping in with services required to facilitate this, it is important that the end-users are empowered to make informed decisions and understand that the economics work in their favour. The need for concerted action on enhancing energy efficiency is much higher today, both for global and domestic reasons,” she said.
Introduction of REIT regulations has been lauded as one of the most important reforms in the real estate sector as it is expected to bring relief to the cash-strapped developers. It is expected to free up cash for developers of commercial assets, who have been facing liquidity issues with limited options for raising funds.
REITs are essentially trusts or companies that raise capital by issuing units or raise debt from investors, invest directly or through a special purpose vehicle (SPV) into revenue-generating real estate assets such as; shopping centres, offices, commercial spaces, etc. The income thus generated from assets of REITs is distributed among its unit holders.
Finance Act 2014 paved the way for introduction of REITs in India. It introduced specific provisions regarding taxation which was one of the key factors for the success of REITs. It was accorded a ‘tax pass-through’ status which means that income earned by the trust would be taxed in the hands of unit-holders and not trust, avoiding double taxation on the same income.
However, there were some issues that the industry felt were not adequately addressed by the finance minister in the last budget. From a taxation standpoint, there were some issues regarding sponsor taxability and some of the provisions being highly taxinefficient vis-a-vis the sponsors. There were certain gaps on the pass-through front, concerns about levying dividend distribution tax or DDT at the SPV level, the stamp duty on contribution of assets to REIT, etc., which needed to be addressed.
Against this backdrop, the real estate sector was hoping that Budget 2015 would address some of the issues and provide the much-needed impetus to the sector.
The finance minister in his Budget speech acknowledged the need to give a boost to REIT listing in India as its success could play a pivotal role in reviving activity in the sector. Budget 2015 amendments have now brought the sponsor at par with the investor by allowing him to avail of the benefit of concessional tax rate on transfer of units of a REIT that have been subject to security transaction Tax (STT). Thus, short-term capital gains arising thereof would be subject to tax at the rate of 15%t and tax exemption has been provided in respect of long-term capital gains, a welcome step that puts the sponsor’s REIT units at par with other listed securities as far as the tax rates are concerned.
Further, rental income received by REIT for directly owned assets, has been given a pass-through and is not subject to withholding on distribution to the REIT. Such leasing income will be taxable only in the hands of the REIT investors and is subject to withholding on distribution by REITs to unit holders. The withholding is at a 10% rate for resident unit holders and at the applicable rate of tax for non-resident unit hold- ers. It is yet to be seen whether non-resident unit holders will be allowed concessional rates prescribed under the applicable tax treaties.
However, some key areas including exemption from levy of DDT for the SPVs, applicability of minimum alternative tax or MAT on the sponsor at the time of contribution to the REIT have still not been addressed. Though passthrough status has been provided for rental income received by the REIT, no such amendment was made in respect of other revenue streams such as maintenance income received by REIT, making the structure possibly inefficient.
The policy is still silent on tax treatment in case of direct transfer of immoveable assets to the trust and while the Budget addressed concerns regarding transfer of shares of SPV by a sponsor providing them with a concessional tax rate, the holding period of three years for REIT units to qualify as long-term capital asset still does not put them at par with listed equity shares for which such period of holding is only 12 months.
Allowing foreign investments in REITs can be critical for its successful implementation. Amendments in foreign exchange management act or FEMA regulations for permitting foreign portfolio investors or FPIs and NRIs to invest in units of REITs without any cap or restrictions would be a welcome move. Modifications in the external commercial borrowings or ECB regulations should also be made so that REITS can leverage foreign debt.
Another issue that requires attention is applicability of stamp duty on transfer of asset by a sponsor to a REIT. Such charges etc render this model as highly cost-inefficient.